Why is Netflix lagging FAANG stocks?

The large-scale technology stocks in the United States experienced a decline in 2022 due to increasing interest rates and uncertain economic conditions. However, they managed to recover during the initial months of this year because of the frenzy surrounding generative artificial intelligence (AI). Nevertheless, there are still concerns regarding the enduring impact of the FAANG stocks.

Commonly referred to as the FAANG shares, Meta (formerly known as Facebook) [META], Amazon [AMZN], Apple [AAPL], Netflix [NFLX], and Alphabet (previously known as Google) [GOOGL] have consistently attracted investors eager to surpass the overall market performance over an extended period.

Over the past six months until 21 July, the Meta stock price has surged by 105.6%, while the Amazon stock price has increased by 33.3% during the same time frame. Additionally, the Apple and Netflix stock prices have experienced gains of 34.6% and 17.5% respectively, while the Alphabet stock price has risen by 20.3%. In contrast, the S&P 500 has seen a rise of 12.8%, and the Nasdaq Composite, which is heavily influenced by technology stocks, has increased by 23.48%.

One of the main reasons why FAANG companies are so appealing is because they have outstanding financial performance and operational achievements, along with impressive profits and promising growth potential. The enthusiasm for generative AI and how giant tech stocks can take advantage of this opportunity drove the FAANG rally during the first six months of the year.

AI is expected to be a major talking point in the upcoming earnings season. Companies like Amazon, Alphabet, Apple, and Meta are anticipated to discuss it in their latest quarterly reports. However, Netflix, which was the first FAANG stock to release its earnings in late July, did not touch upon AI.

Netflix Announces Strikes Commencement

The popular streaming platform shared its financial results for the second quarter of 2023 on July 19th amidst ongoing protests led by actors and writers. These individuals have been actively demonstrating outside the company's main office located in Los Angeles.

Concerns are rising among individuals involved in the film and TV sector regarding the utilization of artificial intelligence (AI) in scriptwriting and the development of digital replicas of actors. In contrast, Netflix is thought to be insulated from the negative effects and disturbances resulting from the strike.

According to Insider Intelligence analyst Ross Benes, Netflix has an advantage over many other platforms due to their efficient production of shows in advance. In case of any difficulty, they can always count on their extensive collection of international shows. This statement was shared with CNBC in July.

During the three-month period ending in June, the company's revenue increased by 3% compared to the previous year, reaching $8.19bn. However, this fell short of the predicted revenue of $8.30bn as stated by Refinitiv analysts. On the other hand, the company's earnings per share were higher than expected, with $3.29 per share exceeding the projected $2.86 per share. Furthermore, net income also experienced a slight growth of just over 3%, rising from $1.44bn to $1.49bn.

Password Crackdown Boosts Netflix's Users

Netflix's earnings report brought a major shock as there were an extra 5.9 million subscribers added since Q1 2023, resulting in a total subscriber count of 238 million for Netflix. This figure exceeded analyst predictions by almost triple, surpassing the estimated 2.1 million mark.

The unexpected gift to subscribers comes as the content creator tightened restrictions on sharing passwords. Analyst Sophie Lund-Yates from Hargreaves Lansdown expressed concerns about this decision potentially leading to a large number of people leaving the platform. However, the statistics alleviated any worries.

According to Lund-Yates' message to clients about the earnings, it appears that the Netflix investors perceive the act of refraining from sharing as an act of care.

The number of people using the ad-supported free subscription of Netflix has almost doubled compared to the previous quarter. The company mentioned in its letter to shareholders that although the current advertising revenue is not significant for Netflix due to the small number of subscribers, it is still growing. At the same time, Netflix has decided to no longer offer the cheapest plan without ads to users in the UK and US.

Is Netflix Still Part Of The FAANG Group?

An important inquiry arising from Netflix's financial results is whether the streaming service should still be categorized as a FAANG company.

According to a note obtained by The Street, Joel Kulina, who was the senior vice president of equity trading at Wedbush, indicated that in 2021, when there was a decrease in subscriber growth following a successful 2020 fueled by the pandemic, the stock had experienced a long period of being separated from other companies in the FAANG group.

Considering the significant effect caused by the strikes of actors and writers, as well as the lack of any reference to AI in its financial report, it can be said that AI has the potential to hinder rather than assist Netflix. This could be a distinguishing aspect for Netflix when compared to the other FAANG stocks in the future.

The anticipated increase in cash projections for the entire year, now upped by $1.5 billion to reach $5 billion by July, is expected to elevate its position in the FAANG group. Nevertheless, those doubtful of its success will probably require consistent growth in the number of subscribers after the measures taken to curb password sharing.

AI Boosts FAANG Investment

Regarding FAANG stocks, the five companies are expected to keep catching the attention of investors as they embrace the newest game-changing technologies in order to secure a favorable position in the market.

In a research publication from May, Justin Lin from Global X Australia explained how the emergence of ChatGPT and generative AI showcases the ability of [FAANG] stocks to swiftly adjust to upcoming major trends. However, it is unrealistic for investors to anticipate a simultaneous surge in FAANG share prices like what occurred during the initial six months of the year.

In the future, I believe that these companies will be evaluated based on their core operations. Mark Hawtin, the manager of the GAM Star Disruptive Growth fund, expressed during the FTAdviser podcast in March that Google, for instance, operates primarily as an advertising enterprise, and this is what will garner the attention of people.

Investing In FAANG Stocks: A Guide

ETFs, which are traded on exchanges, provide a cost-effective and well-rounded method to invest in a range of stocks centered around a specific theme.

Global X Millennial Consumer ETF- A Look At The Funds

For individuals seeking a chance to invest in the renowned FAANG stocks and other major US-listed giants, the Vanguard Mega Cap Growth ETF [MGK] presents itself as a viable choice. Within its portfolio, the technology and consumer discretionary sectors account for 55.9% and 22.8% respectively. As of 21 July, the fund has seen an impressive 19.3% growth over the past year and a remarkable 29.5% growth in the past six months.

The Global X Millennial Consumer ETF [MILN] presents an alternative approach to benefit from the FAANG trend by including all five stocks in its portfolio. The greatest proportion of MILN is allocated to the consumer discretionary sector, representing 41% of the fund. Communication services and information technology follow closely with weightings of 25% and 14.8% respectively, as of 24 July. The remaining portions of the portfolio consist of real estate, industrials, financials, consumer staples, and healthcare. Over the course of the past year, the fund has experienced a growth of 18.6%, and in the past six months, it has seen a rise of 14.7%.

The primary objective of the FANG.AX, a well-known exchange-traded fund, is to mirror the NYSE FANG+ Index's performance, thereby delivering investors with comparable outcomes. The IT industry dominates the fund's portfolio with a substantial 49.3% allocation, while communication services encompass 30.1% and consumer discretionary holds 20.4%. Admirably, this fund has witnessed a remarkable surge of 49.6% over the past year, and its growth trajectory has continued over the last six months, reaching an impressive 64.5% hike.

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